Europe vs. the US-China Trade War: Is It Losing Ground in International Trade?

International trade has increasingly become an instrument of geopolitical power. Tariffs, export restrictions, subsidies and controls over strategic technologies are no longer merely economic measures: they can also be used to put pressure on other governments, reshape supply chains and influence international relations. The escalation of trade tensions between the United States and China in 2025 demonstrated how quickly decisions taken by the world's two largest economic powers can affect businesses and consumers far beyond their borders.

For the European Union, this confrontation presents a difficult challenge. The EU is deeply integrated into global markets, with major industries relying on international supply chains and access to foreign customers. Its economic relationship with the United States is particularly important for European exporters, while China remains a major supplier of manufactured goods, machinery and electronic equipment. Europe therefore has to manage two different forms of exposure: the risk that American tariffs will make European exports less competitive, and the possibility that Chinese trade restrictions or industrial policies will disrupt supplies and intensify pressure on European manufacturers.

The question is whether the EU can protect its interests while avoiding a trade conflict that would damage its own economy.

The economic impact: dependence creates both risks and leverage

The scale of Europe's exposure becomes clear when examining its trade figures. In 2025, the EU exported approximately €554 billion in goods to the United States and imported around €354 billion, generating a goods trade surplus of roughly €200 billion. The United States was the EU's leading export destination, making access to the American market particularly important for European manufacturers.

The relationship with China presents a different picture. In 2025, the EU exported €199.6 billion in goods to China while importing €559.4 billion, resulting in a trade deficit of approximately €359.8 billion. Machinery, electrical equipment, vehicles and pharmaceutical products feature prominently in this commercial relationship, although the composition of trade varies considerably between sectors.

These figures help explain why the EU cannot approach both relationships in the same way. American tariffs can directly affect the price competitiveness of European goods in a major export market, while restrictions on Chinese supplies can increase costs for businesses that depend on imported components or materials. At the same time, a large trade relationship does not automatically mean that one side has no bargaining power: the United States also depends on European goods, services and investment, while China benefits from access to the European single market.

The effects of tariffs are not limited to the companies directly targeted. A manufacturer may face higher costs because an imported component becomes more expensive, while an exporter may lose customers because its products become more costly in the destination market. Businesses may respond by changing suppliers, renegotiating contracts, absorbing part of the cost or passing it on to customers. The final impact depends on the product, the applicable tariff, the availability of alternatives and the ability of each business to adjust.

Small and medium-sized enterprises can be particularly exposed because they often have fewer resources to reorganise supply chains or absorb unexpected costs. For them, trade uncertainty can be almost as significant as the tariff itself, especially when long-term contracts, investment decisions and delivery schedules depend on stable market access.

The EU–US agreement: stability at a price

One of the most important developments of 2025 was the political agreement reached between the EU and the United States in July, followed by a joint statement in August. The framework established a US tariff ceiling of 15% for most EU exports, subject to specific arrangements and exceptions. It also included commitments concerning EU tariffs on US industrial goods and certain agricultural and seafood products. 

The agreement reduced some of the uncertainty surrounding transatlantic trade, but it did not eliminate the underlying tensions. A tariff ceiling can provide greater predictability than an escalating series of unilateral measures, yet it still leaves European exporters facing duties that may affect their competitiveness. The treatment of particular sectors also matters: arrangements for aircraft, pharmaceuticals, steel, aluminium and other products do not necessarily follow the same rules.

The agreement therefore illustrates a central dilemma for European trade policy. Negotiation can prevent a more damaging confrontation, but a negotiated settlement does not necessarily restore the conditions that existed before the dispute. The EU must assess whether the resulting terms protect its long-term interests, not merely whether they bring a temporary pause in tariff escalation.

The legal and institutional process also matters. A political understanding does not automatically have the same status as a fully implemented international agreement or binding EU legislation. The content of the commitments, their implementation and the measures adopted by each side must be examined separately. Businesses need to know which tariff rules apply to their products, from what date and under what conditions, rather than relying on broad descriptions of a political deal.

Trade defence and the limits of unilateral action

The EU has instruments available to respond to unfair trade practices and protect its economic interests, including anti-dumping duties, countervailing measures against subsidised imports and safeguards where the relevant legal conditions are met. These mechanisms are subject to procedural requirements and evidential standards; they are not simply political tools that can be activated whenever another country imposes tariffs.

The distinction is important under World Trade Organization rules. The General Agreement on Tariffs and Trade establishes principles such as most-favoured-nation treatment and limits on customs duties, while WTO agreements regulate subsidies, anti-dumping measures and safeguards. Whether a particular tariff is lawful depends on its legal basis, the commitments involved and any applicable exceptions. A government may invoke national security or other justifications, but such claims do not remove every question of international legal scrutiny.

The 2025 US–China dispute also generated WTO litigation. China challenged additional US tariffs through the WTO dispute settlement system, arguing that the measures were inconsistent with obligations under the General Agreement on Tariffs and Trade. These were Chinese complaints against US measures, not proof that the EU had itself brought equivalent proceedings against both Washington and Beijing in response to the same trade war.

The EU has also pursued separate disputes with China over trade restrictions. This reflects a broader point: Europe's legal strategy must be based on the specific measure being challenged, the relevant treaty obligations and the evidence available. WTO litigation can clarify legal obligations and reinforce a rules-based trading system, but proceedings take time and do not always provide an immediate commercial remedy.

For European companies, international trade tensions create additional practical risks. Businesses must check tariff classifications, rules of origin, customs valuation, export controls and sanctions where applicable. They should also review contractual provisions governing changes in law, additional duties, delivery delays and disputes. Arbitration clauses can help resolve certain commercial disagreements, but they do not eliminate tariffs or determine whether a government measure complies with international trade law.

China, industrial policy and economic security

The challenge posed by China extends beyond tariffs. European policymakers have expressed concerns about industrial subsidies, excess production capacity, market access restrictions and dependence on concentrated sources of critical goods. These concerns are particularly significant in sectors such as electric vehicles, batteries, semiconductors, telecommunications and critical raw materials.

The EU's response has included trade-defence investigations and measures intended to address specific competitive distortions. For example, the EU imposed additional countervailing duties on imports of battery electric vehicles from China following an anti-subsidy investigation. Such measures are legally distinct from general tariffs imposed as part of a broader political confrontation: they are based on a particular investigation and the applicable EU trade-defence framework.

At the same time, European policy cannot simply assume that reducing imports is always beneficial. Imported components can support European manufacturing, lower costs for consumers and help companies compete in international markets. Restrictions that protect one industry may increase costs for another, while retaliation can affect European exporters that have little connection to the original dispute.

The more difficult task is to distinguish between ordinary international competition and practices that create a demonstrable legal or economic problem. Effective trade policy requires evidence, proportionate responses and a clear assessment of the wider consequences for European industry.

Diversification and strategic autonomy

One response to geopolitical trade pressure is to diversify trading relationships. The EU has pursued negotiations and partnerships with a range of countries and regions, including Canada, India, Mercosur and partners in Southeast Asia. Diversification can give businesses more options when a particular market becomes less accessible and reduce the risks associated with relying on a single supplier for essential goods.

However, diversification is not immediate or cost-free. Alternative suppliers may lack the capacity to replace existing production, while new trade agreements require negotiations, legal implementation and time for companies to establish commercial relationships. Businesses may also need to adapt to different technical standards, customs procedures and regulatory requirements.

The EU's broader concept of strategic autonomy addresses a related issue: the ability to make decisions and maintain essential economic functions without excessive dependence on external powers. This does not necessarily mean producing everything within Europe or withdrawing from global trade. Rather, it involves identifying critical vulnerabilities and ensuring that Europe has credible alternatives in areas where disruption would have serious consequences.

Investment in research, infrastructure, energy, defence, digital technologies and critical raw materials can contribute to this objective. So can a stronger internal market that allows European businesses to expand across borders and benefit from economies of scale. Yet industrial policy requires difficult choices about public spending, competition, state aid and the allocation of resources among Member States.

Strategic autonomy should therefore be understood as a policy objective that needs to be balanced against the benefits of openness. A Europe that seeks complete self-sufficiency would face enormous costs and risk losing access to international expertise and markets. A Europe that ignores strategic dependencies, on the other hand, may find that commercial relationships can be used as instruments of political pressure.

Can Europe become a more influential trade power?

The EU already has a common commercial policy, which gives it a significant advantage in international negotiations. Under Article 3(1)(e) of the Treaty on the Functioning of the European Union, the common commercial policy falls within the Union's exclusive competence. Article 207 sets out its framework, including the principles governing changes in tariff rates, trade agreements and trade-defence measures.

This means that the EU can negotiate and adopt many trade measures collectively rather than leaving each Member State to pursue separate tariff policies. A common approach gives the Union access to the bargaining power of a large single market. Nevertheless, differences between Member States remain important because their economies are exposed to international trade in different ways. An export-oriented industrial economy may have different priorities from a country whose businesses depend more heavily on imported goods or whose agricultural sector is particularly sensitive to competition.

Europe's influence will therefore depend not only on its legal powers, but also on its ability to agree on priorities and implement them consistently. A credible strategy needs to combine negotiations with the enforcement of trade rules, investment in innovation, support for affected workers and regions, and proportionate responses to unfair practices.

Greater economic and fiscal coordination may help strengthen Europe's capacity to respond to external shocks, but it is not a substitute for careful trade policy. Nor does every trade dispute require a move towards a federal union. The more immediate question is whether existing EU institutions and instruments can be used effectively, and where genuine gaps in coordination or economic capacity need to be addressed.

Conclusion

The trade tensions of 2025 exposed the risks of Europe's dependence on external markets and supply chains, but they also demonstrated the importance of the EU's collective economic weight. The agreement with the United States showed the value of negotiation in reducing uncertainty, while disputes involving China highlighted the need for evidence-based trade defence and more resilient supply chains.

Europe does not need to choose between unrestricted globalisation and economic isolation. It needs a trade policy capable of preserving the benefits of open markets while addressing unfair practices, excessive dependencies and geopolitical pressure. That requires legal certainty for businesses, effective enforcement of international commitments, investment in strategic sectors and cooperation among Member States.

Ultimately, the EU's influence will depend on whether it can translate the size of its market into consistent and credible action. Strategic autonomy is not achieved simply by imposing tariffs or declaring an ambition to become more independent. It requires the economic capacity, institutional coordination and legal discipline to defend European interests while remaining an active participant in the global trading system.